The government is likely to bar foreign venture capital funds (VCF) from investing in compulsory convertible debentures (CCD) and other quasi-equity instruments. Officials rewriting the norms governing foreign venture capital investor (FVCI) plan to restrict investments to pure equity.
Sources said the new definition of venture funding would ensure they are directed towards equity that has risk associated with it.
Fundamentally, venture funding is associated with risk as its aim is to finance startups and upcoming entrepreneurs. However, there is a view among the policymakers that venture capital funds have been avoiding the risks associated with funding startups and going in for more secure forms and avenues of investments such as debt and listed securities.
The risks associated with debt were low as it ensured an assured return to the investor, they feel. Pointing out that the benefits the funds got were in lieu of the risks associated with funding startups, they said the new definition of venture funding would reflect the risk element.
Foreign venture funds enjoy exemption from Sebi takeover code, lock-in or entry and RBI’s exit pricing norms. Officials from the finance ministry, RBI and Sebi have had a detailed discussion on the overall review of norms for FVCIs and new guidelines are being formulated.
RBI had raised an alarm about investments of foreign venture funds not following the norms both in letter and spirit. Since debt exposure of the funds was de facto external commercial borrowing, RBI had asked the government to look into the issue.
Its concern stems from the fact that a large number of real estate players were receiving funding from foreign venture funds in the form of financial instruments camouflaged as equity but were debt in all respects, such as CCDs with a put option.
While the picture emerged with respect to real estate, policymakers felt the issue needed to be examined in detail as such debt side-stepped the limit set by the government and RBI.
Source: Economic Times